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CIRCULAR No

CIRCULAR No. 79/2002/TT-BTC OF SEPTEMBER 12, 2002 GUIDING THE DETERMINATION OF VALUE OF ENTERPRISES UPON THEIR TRANSFORMATION INTO JOINT-STOCK COMPANIES

(According to Decree No.64/2002/ND-CP of June 19, 2002)

Part I

GENERAL PROVISIONS

1. This Circular guides the methods of, and procedures for, determining the value of enterprises which undertake equitization according to the provisions of the Government�s Decree No.64/2002/ND-CP of June 19, 2002 on the transformation of State enterprises into joint-stock companies (hereinafter referred to as Decree No.64/2002/ND-CP for short).

2. Some words and phrases in this Circular shall be construed as follows:

2.1. The method of determining the enterprises� value according to their assets: is the method of determining the value of an enterprise based on the actual value of its total tangible and intangible assets at the time of valuation.

2.2. The discount currency flow (DCF) method: is the method of determining the value of an enterprise based on its future profitability, irrespective of the value of its assets.

2.3. Time for determining the value of an enterprise:

- For cases of applying the asset-based valuation method: It is the end of the quarter before the date of issuance of the enterprise�s equitization decision by the competent agency.

- For cases of applying the DCF method: It is the end of the fiscal year before the date of issuance of the enterprise�s equitization decision by the competent agency.

2.4. The enterprise�s value according to accounting books: is the total value of its assets reflected in its accounting balance sheet under the current accounting regime.

2.5. The value of the State capital at the enterprise according to its accounting books: is the enterprise�s value according to its accounting books minus (-) the payable debts, the balances of the welfare fund and reward fund, and the balance of non-business funding (if any).

2.6. The agencies deciding on enterprise equitization and value mean:

a/ The ministers, the heads of the ministerial-level agencies and agencies attached to the Government, for centrally-run State enterprises (including member enterprises of State corporations).

b/ The presidents of the People�s Committees of the provinces and centrally-run cities, for locally-run State enterprises (including member enterprises of State corporations).

3. The interest rate of the Government bonds of 10-year term used for determination of the value of enterprises shall be based on the Finance Ministry�s monthly notices on the Financial Times or the Enterprise Financial Journal.

4. The agencies competent to decide on the value of enterprises shall decide on the setting up of the councils for determination of the value of enterprises or select organizations with valuation function to determine the value of the equitized enterprises.

5. The results of enterprise-value determination by the above-mentioned methods shall, after being approved by competent agencies, be valid for only 12 months as from the date of their signing for approval, and serve as basis for enterprises to perfect their equitization plans, organize the sale of shares and proceed to the enterprise-transformation steps.

In cases where after 12 months the enterprises still fail to be completely transformed into joint-stock companies, their value shall be re-determined according to the new price floor.

Part II

SPECIFIC REGULATIONS

I. METHOD OF DETERMINING THE ENTERPRISES� VALUE ACCORDING TO THE VALUE OF THEIR ASSETS

1. Subjects of application are State enterprises and their dependent units engaged in production and/or business activities, except for enterprises valued by the DCF method defined in Section II, Part II of this Circular.

2. The enterprises� actual value shall be determined on the basis of the results of inventory, classification and evaluation for determination of the actual value of their total assets for equitization according to market prices at the time of valuation.

2.1 For assets in kind:

a/ To revalue only those assets of enterprises which are expected to be further used after the transformation of enterprises into joint-stock companies. The revaluation shall not be effected on assets redundant, stockpiled or awaiting liquidation, whose value shall not be calculated into the actual value of the equitized enterprises as prescribed in Clause 2, Article 15 of Decree No.64/2002/ND-CP.

b/ The actual value of assets shall be determined on the basis of the market prices and assets� quality at the time of valuation.

c/ The assets� quality shall be determined equal to their residual value in percentage against the original prices of newly-procured or -invested assets.

The determination of the enterprises� asset quality for equitization must ensure the principles stipulated in Clause 1, Article 17 of Decree No.64/2002/ND-CP. Concretely:

- For assets being houses, architectural objects, machinery and equipment to be further used, their quality must not be lower than 20%.

- For assets being transport means to be further used, their quality must not be lower than 20% and they must ensure the conditions for circulation prescribed by the Ministry of Communications and Transport.

d/ Market prices used for determination of the actual value of assets are:

- The current purchase and sale prices on the market plus the transportation and installation costs (if any), for assets being machinery, equipment and transport means being circulated on the market. For particular assets not circulated on the market, the purchase prices of assets of the same type, with the same capacity or equivalent properties shall be used for calculation. Where such equivalent assets are unavailable, the assets� prices in accounting books shall be used for calculation.

- The investment construction unit prices set by the competent agencies for assets being investment and construction products. Particularly for projects newly invested and built within 3 years before equitization, the value of project settlement already approved by competent authorities shall be used.

e/ For fixed assets already totally depreciated or managerial tools no longer valuable but still being used by enterprises at the time of equitization, their value must be re-determined so as to be added to the value of enterprises according to the principle mentioned at Item "c" above.

2.2. For assets in cash, their value shall be determined according to the capital balance in cash already verified by the cashiers or compared and certified by concerned banks at the time of determining the value of enterprises. If the balance is in foreign currency(ies), the revaluation shall be conducted according to the average transaction exchange rates on the inter-bank foreign currency market announced by Vietnam State Bank at the time of determining the enterprises� value.

2.3. For to be-recovered debts: They are the debts already compared and certified or being circulated at the time of valuation.

2.4. For incomplete expenses (including production and business expenses, non-business expenses, expenses for investment in capital construction), they shall be calculated according to the actual expense balance in accounting books.

2.5. For short-term and long-term collateral and deposit assets, they shall be calculated according to the actual balance in accounting books, which have already been compared and certified at the time of determining the enterprises� value.

2.6. For intangible assets (if any), they shall be calculated according to their residual value being accounted in accounting books.

2.7. For short-term and long-term financial investments to be inherited by the joint-stock companies, they shall be calculated according to their balance in accounting books. Particularly for investments in capital contribution to, or share purchase from, other enterprises, the shares� value and the value of contributed capital shall be re-determined according to the owners� capital value reflected in the financial reports of the equitized enterprises, provided that such capital contribution or share purchase were effected at the time right before the time of determining the value of the equitized enterprises.

2.8. For assets being capital contributed to joint ventures with foreign parties: If they are inherited by the equitized enterprises, their value shall be calculated into the equitized enterprises� value on the basis of:

- The owners� capital value (excluding the balance of the reward fund and welfare fund) reflected in the joint- ventures� financial reports at the time right before the time of determining the value of the equitized enterprises and already audited by independent auditing bodies.

- The equitized enterprises� proportions of capital contribution to the joint- ventures.

- The rates of exchange between the foreign currency(ies) used for capital contribution and Vietnam dong according to the average transaction exchange rates on the inter-bank foreign currency market announced by Vietnam State Bank at the time of valuation (for joint-ventures conducting cost-accounting in foreign currencies).

In cases where enterprises contribute capital to joint-ventures with foreign parties with the land use right value, that land use right value shall also be included in the value of the equitized enterprises according to the above stipulations.

The value of assets contributed as capital to joint- ventures and determined on the above-mentioned grounds shall serve as basis for determining the value of the equitized enterprises; the value of capital contributed to joint- ventures as inscribed in the investment licenses shall not be adjusted.

2.9. For enterprises with business advantages in terms of geographical position, prestige or monopoly of products, designs or trademarks (if any) and with after-tax profit ratio higher than the interest rate of the Government bonds of 10-year term at the time right before the time of valuation, the value of such business advantages must also be calculated into the actual value of the equitized enterprises as follows:

- Determining the value of the enterprise�s business advantages according to its profit ratio in 3 consecutive years right before the equitization:

The value of The average The

The value State capital ratio of the interest rate of

of business at the enterprise after-tax profit the Government

advantages = according to x to the State capital � bonds of 10-year

of the its accounting in 3 consecutive term at the

enterprise books at the time years before latest time

of valuation equitization

The average The average after-tax profit of 3 consecutive

ratio of the after-tax years right before equitization

profit to the State capital = ------------------------------------------------------------ x 100%

in 3 consecutive years The average State capital according to accounting

before equitization books in 3 consecutive years right before equitization

- In cases where the enterprise�s trademark value already determined or accepted by the market is higher than the value of its business advantages determined according to the above stipulations, the value of the enterprise�s trademark reflected in its accounting books or accepted by the market shall be calculated into the value of the equitized enterprise. If the trademark value is lower than the value of business advantages, the difference shall be added to the value of the equitized enterprise.

2.10. Regarding the land use right:

a/ For land area leased by State enterprises: State enterprises undertaking the equitization shall, after being converted into joint-stock companies, inherit the land-lease contracts and have to fully comply with the State�s regulations on the use of land.

In cases where State enterprises have purchased the land use right from individuals or other legal persons with money originating from the State budget, they must shift to land lease as prescribed in Article 29 of the Government�s Decree No.04/2000/ND-CP of February 11, 2002 on the implementation of the Law amending and supplement a number of articles of the Land Law. In equitization, only those expenses that increase the land use right value and the value of assets affixed onto the land, such as compensation, clearance, ground-leveling expenses... shall be calculated into the value of enterprises.

b/ For land areas assigned by the State to enterprises for house and infrastructure business and the enterprises need not to pay money for land use right transfer or have already paid this money, which, however, becomes different at the time of valuation, the land use right value or the difference in terms of the land use right value must be calculated into the value of the equitized enterprises.

The land use right value shall be determined on the basis of the current price bracket applicable to land use right transfer announced by the competent authority.

c/ For land areas already used by enterprises for joint-ventures with domestic enterprises, the land use right value contributed as capital to the joint-ventures shall also be calculated into the value of the equitized enterprises as prescribed in Clause 2.8.

2.11. The value of other assets (if any)

The actual value of enterprises for equitization shall be the total of items listed in Item 2 above.

3. Determining the actual value of the State capital at enterprises:

The actual value of the State capital at an enterprise is the total actual value of the enterprise minus (-) the actually payable debts, the balance of the reward fund and welfare fund and the balance of non-business funding (if any).

The actually payable debts mean the total of debts including short-term debts, long-term debts and other debts of enterprises, excluding debts which need not to be paid due to the debtors� causes, for example the debtors have dissolved, gone bankrupt, died, escaped or rejected their right to claim debt payment.

II. METHOD OF DETERMINING THE ENTERPRISES� VALUE ACCORDING TO DISCOUNT CURRENCY FLOW

1. Subjects of application:

This method shall be used to determine the value of State enterprises engaged in trade services, consultancy services, construction designing, financial services, auditing, informatics and technology transfer that have the average ratio of their after-tax profit to the owners� capital in 5 consecutive years right before equitization higher than the interest rate of the Government bonds of 10-year term at the time right before the time of determining the value of enterprises.

2. Bases for determination:

The actual value of enterprises and the actual value of the State capital at enterprises shall be determined on the basis of:

- The enterprises� financial reports in 5 consecutive years right before the determination of their value.

- The enterprises� production and business plans for 3 to 5 years after they are converted into joint-stock companies.

- The interest rate of the Government bonds of 10-year term at the time right before the time of determining the value of enterprises and the currency flow discount coefficients of the valued enterprises.

3. Determining the actual value of the State capital at enterprises:

The actual value of the State capital at enterprises at the time of valuation shall be determined according to the following formula:

The actual Di Pn

value of the = S ----------------- + ---------------

State capital i = 1®n (1+ K)i (1 + K)n

In which:

Di
--------------
(1+ K)i : is the current value of dividends in the year i

Pn

-----------------
(1 + K)n : is the current value of the State capital in the year n.

i: is the order of consecutive years as from the year of determining the enterprise�s value (i: 1 ® n).

Di : is the after-tax profit used for dividend distribution in the year i.

n: is the number of selected years in the future (from 3 to 5 years).

Pn : is the value of the State capital in the year n, which shall be determined according to the following formula:

Dn+ 1

Pn = ----------------

K- g

Dn+ 1 : is the after-tax profit used for projected dividend distribution in the year n+1

K: is the necessary discount rate or capital retrieval rate of the investors when buying shares, which shall be determined according to the following formula:

K = Rf + Rp

Rf: is the ratio of profit gained from non-risk investments, which shall be calculated as equal to the interest rate of the Government bonds of 10-year term at the time right before the time of determining the enterprise�s value.

Rp : is the risk surcharge rate upon investment in the shares of Vietnamese companies, which shall be determined according to the table of risk surcharge rate indexes of international securities in the valuation directory or determined by the valuing companies for each enterprise but must not exceed the ratio of profit gained from non-risk investments (Rf).

g: is the annual growth rate of dividends and shall be determined as follows:

g = b x R

In which:

b: is the percentage of after-tax profit retained for capital supplementation.

R is the average ratio of the after-tax profit to the owners� capital in the future years.

4. The positive difference between the State capital amount actually used for equitization and that inscribed in accounting books shall be accounted as a business advantage and recognized as an intangible asset, and appreciated according to the State-prescribed regime.

5. The actual value of enterprises:

On the basis of the actual value of the State capital already determined according to the above-mentioned principle, the actual value of an equitized enterprise at the time of valuation by the DCF method shall be determined as follows:

The The The The The balance

enterprise�s actual payable reward fund�s of non-

actual = value of + balance + and welfare + business

value the State debts fund�s funding

capital in cash (if any)

III. ORGANIZATION OF DETERMINATION OF THE VALUE OF THE EQUITIZED ENTERPRISES

1. After completing the preparation work, the equitized enterprises shall have to promptly finalize dossiers for determination of their value and send them to the agencies competent to decide on equitization for verification and issuance of decisions on organizing their value determination.

A dossier for determination of the value of an enterprise shall include the following major documents:

- The enterprise�s financial reports and tax settlement reports at the time of valuation.

- The report on inventory results and determination of the value of the enterprise�s assets, made according to the form provided for in Appendix 1 to this Circular (not printed herein).

- The copy of the detailed dossier on problems requested to be handled upon determination of the value of the enterprise.

- Other necessary documents (depending on which measure is applied to the determination of the value of the enterprise).

2. Within 15 days after receiving the enterprise�s complete dossier and official dispatch requesting the organization of verification and determination of its value, the equitization-deciding agency shall have to issue a decision to set up the council for determination of the enterprise�s value or select an auditing company or economic organization with valuation function to determine the value of the equitized enterprise.

Depending on the characteristics of each branch, the council for determination of the enterprise�s value or the auditing company or the economic organization with valuation function may select a suitable method from the two ones provided for in Part II of this Circular to determine the value of the enterprise. In case of applying a method other than the above-mentioned ones, it must report such to the Finance Ministry for permission of experimental application.

3. Composition and responsibilities of the council for determination of the enterprise�s value

3.1. The composition of the council for determination of the enterprise�s value shall be determined according to the provisions in Clause 2, Article 20 of Decree No.64/2002/ND-CP, including:

a/ The representative of the enterprise equitization-deciding agency, as its chairman, who may be:

- A leader of the Accounting Department or Economics-Finance Department of the ministry, ministerial-level agency or agency attached to the Government (for councils for determination of the value of enterprises under the ministries and centrally-run corporations), to be selected and authorized by the minister, the head of the ministerial-level agency or agency attached to the Government.

- A leader of the provincial/municipal Finance-Pricing Service or the branch-managing service of the province or centrally-run city (for councils for determination of the value of enterprises managed by the provinces or centrally-run cities), to be selected and authorized by the president of the People�s Committee of the province or centrally-run city.

b/ The representative of the finance agency, who is

- The representative of the Enterprise Finance Department, for enterprises under the ministries, the ministerial-level agencies, the agencies attached to the Government and centrally-run Corporations.

- The representative of the Enterprise Finance Sub-Department or enterprise finance section of the provincial/municipal Finance-Pricing Service, for enterprises managed by the provinces or centrally-run cities.

c/ The representative of the State corporation (if the enterprise is a member of the corporation).

d/ The leader of the equitized enterprise.

Besides, based on the actual situation of the enterprise and concrete requirements, the council may invite organizations or technical and/or financial experts inside and outside the enterprise to join in the evaluation of quality and determination of the actual value of each kind of assets in the enterprise.

The council for determination of the enterprise�s value is assisted by a team of experts from agencies being the council�s members.

3.2. Responsibilities of the council for determination of the enterprise�s value:

a/ To appraise the results of inventory, classification and valuation of assets and determine the value of the equitized enterprise according to the principles prescribed in this Circular within 15 days after its setting up.

b/ To re-determine the enterprise value if it is requested by the equitization-deciding agency.

4. The agency competent to decide on equitization shall assume the prime responsibility (with participation of representatives of the equitized enterprise) in organizing bidding to select an auditing company or economic organization with valuation function to determine the value of the equitized enterprise.

The bidding results must be notified in writing to the equitized enterprise so that the latter may sign contract to hire the bid-winning auditing company or economic organization to determine the value of the equitized enterprise. The costs of hiring shall be included in the enterprise�s equitization costs. The auditing company or economic organization hired for valuation shall have to strictly comply with this Circular�s guidance and complete the valuation on schedule according to the signed economic contract, and at the same time, take responsibility for the accuracy and legality of the valuation results under law provisions.

5. The results of determination of the value of an enterprise must be recorded in writing (according to the form provided for in Appendix 2, if the valuation is conducted by the asset-based method, or Appendix 3, if it is conducted by the DCF method). The record must be signed by both parties (the enterprise and the unit determining its value or the official members of the council) and sent to the equitization-deciding agency for consideration and decision.

6. All dossiers for determination of the value of enterprises and decisions approving or adjusting the value of enterprises must be sent to the Central Steering Committee for Renewal and Development of Enterprises and the Finance Ministry for inspection and supervision.

The equitization-deciding agencies shall have to organize the re-determination of the value of enterprises when so requested by the Central Steering Committee for Renewal and Development of Enterprises or the Finance Ministry.

IV. COMPETENCE TO DECIDE ON AND ADJUST THE VALUE OF EQUITIZED ENTERPRISES

1. The competence to decide on and adjust the value of equitized enterprises shall comply with the provisions in Clause 2, Article 30 of the Government�s Decree No.64/2002/ND-CP of June 19, 2002, concretely:

- The ministers, the heads of the ministerial-level agencies and agencies attached to the Government shall decide on or adjust the value of equitized enterprises under the ministries or centrally-run corporations.

- The presidents of the People�s Committees of the provinces and centrally-run cities shall decide on or adjust the value of locally-run equitized enterprises.

2. Within 7 days (after fully receiving dossiers and records on appraisal of the enterprise valuation results), the competent agencies must issue decisions to publicize the value of equitized enterprises.

In cases where the results of determination of the value of enterprises given by the valuing organizations are unclear or lack grounds, the equitization-deciding agency shall request the valuing organizations to supplement documents for explanation before issuing decisions.

3. Cases of deciding on or adjusting the value of enterprises where the actual value of the State capital is VND 500 million less than that value reflected in accounting books must be approved in writing by the Finance Ministry.

Part III

IMPLEMENTATION PROVISIONS

This Circular takes effect as from July 4, 2002.

All documents guiding issues related to determination of the value of enterprises upon their transformation into joint-stock companies, which are contrary to this Circular, are hereby annulled.

In the course of implementation, the ministries, branches, provinces, centrally-run cities and equitized enterprises are requested to report their problems to the Finance Ministry for study and settlement.

For the Finance Minister

Vice Minister
TRAN VAN TA